CFA Level I Exam · Fixed-Income Instrument Features

Maturity, Principal Repayment and Amortization of Bonds

Updated 7 October 2026 · Fact-checked

Principal repayment structure describes how a bond's face value is paid back. A bullet bond repays all principal at maturity. A fully amortizing bond repays principal gradually, so the balance reaches zero. A partially amortizing bond leaves a balloon payment. A sinking fund retires bonds before maturity.

Understand Maturity, Principal Repayment and Amortization

A bond has two cash flow streams: interest and principal. Maturity is the date the issuer must repay the remaining principal. Tenor is the time left until that date. What changes between bond types is how, and when, principal comes back.

In a bullet bond, you receive periodic coupons and the full face value at maturity. Most government and corporate bonds work this way. The outstanding principal stays constant, so for a fixed-rate bullet bond each coupon is the same size. The risk is concentrated at the end, because the issuer needs a large lump sum on one day.

In an amortizing bond, each payment includes interest and some principal. A fully amortizing bond pays down the balance to zero by maturity, so there is no final lump sum. A common version has level payments: the interest part falls over time and the principal part rises. A partially amortizing bond pays down some principal but leaves a balloon payment at maturity. Interest is always charged on the outstanding balance at the start of each period.

A sinking fund provision requires the issuer to retire a set part of the issue over time. It can do this by depositing money into a fund to repurchase bonds, or by calling a portion of the bonds at a stated price, often par. It lowers credit risk because the debt is reduced before the end. It also creates reinvestment risk for you: your bond may be retired early, often at par, which matters if it trades above par. Some structures differ in detail, such as a sinking fund with a schedule of amounts that rise over time, or one that lets the issuer retire more than required.

A related feature is a serial bond structure, where one issue has different portions maturing on different dates, so principal comes back in instalments. Do not confuse this with a waterfall, which is a different idea: the order of priority in which cash flows are paid to different tranches, as in securitization. The exam mainly asks you to tell structures apart and see how they change cash flow timing and risk.

Key formulas to remember

Interest in a period: Interest = Beginning balance × periodic rate; Applies to every structure. Use the periodic rate (annual rate ÷ payments per year).
Principal repaid in a period: Principal repaid = Total payment − Interest; For level-payment amortizing bonds, the total payment stays fixed while the interest part falls.
Ending balance: Ending balance = Beginning balance − Principal repaid; Carry this forward as the next period's beginning balance.
Level payment (fully amortizing): PMT = PV × r ÷ [1 − (1 + r)^−n]; r is the periodic rate and n is the number of periods. On a calculator, solve for PMT with FV = 0.
Balloon payment (partially amortizing): Balloon = Remaining balance at maturity after the last regular payment; On a calculator, set FV to 0 for full amortization. A nonzero balance means a partial structure.
Bullet bond cash flows: Coupon each period = Face value × coupon rate ÷ payments per year; principal = Face value at maturity; Principal does not change before maturity.

How to solve Maturity, Principal Repayment and Amortization questions

Use this order for any question on repayment structure, schedules or sinking funds.

1Identify the structure from the wording: bullet, fully amortizing, partially amortizing (balloon), or sinking fund.
2Write down the face value or loan amount, the periodic rate and the number of periods. Convert annual rates to periodic rates.
3For a level-payment bond, find the payment with the PMT formula or calculator, setting FV = 0 for full amortization or FV = balloon amount for partial.
4Compute interest for the period as beginning balance × periodic rate.
5Compute principal repaid as payment − interest, then ending balance as beginning balance − principal.
6Check the structure logic: bullet balance stays constant; fully amortizing balance ends at zero; partial ends at the balloon.
7For sinking fund questions, decide who benefits: the issuer gains flexibility, the lender gets lower credit risk but faces reinvestment risk and early retirement.
8Eliminate the two wrong options by testing them against the structure logic before doing heavy arithmetic.

Quickest way: Structure test and one-period check

When to use it: Use this when time is short and the question asks for first-period interest or principal, or which structure fits a description.

Ask: does the balance fall before maturity? If no, it is a bullet bond.
Ask: does the balance reach zero at maturity? If yes, fully amortizing. If a lump sum remains, partially amortizing.
For first-period numbers, you do not need the full schedule: interest = loan × periodic rate.
For level payments, the first principal repaid = payment − first interest. In a level-payment amortizing bond, principal repaid rises each period, so later principal is larger than the first. If the structure has equal principal instalments instead, principal repaid stays constant and the total payment falls.
If options are in ascending order, check which are plausible: first-period principal must be smaller than the payment and positive.

Common mistakes in Maturity, Principal Repayment and Amortization

Treating coupon as constant in an amortizing bond
Students carry over the bullet bond habit that coupon = face × rate.
Fix: In amortizing structures, interest falls as the balance falls. Always apply the rate to the beginning balance.
Using the annual rate on monthly or semiannual payments
The rate is quoted annually and students skip the conversion.
Fix: Divide the annual rate by payments per year and multiply years by payments per year before using PMT or interest calculations.
Confusing partially amortizing with fully amortizing
Both repay principal over time, so they look alike.
Fix: Check the final balance. A remaining lump sum at maturity (balloon) means partial amortization.
Saying a sinking fund always benefits the bondholder
Lower credit risk is easy to remember, so the downside is forgotten.
Fix: Remember both sides: lower default risk, but early retirement at a set price means reinvestment risk, especially when rates have fallen.
Assuming principal repaid is constant in a level-payment loan
The total payment is constant, so students assume every part is constant.
Fix: Only the total payment is constant. Interest declines and principal repaid rises each period.
Forgetting FV when using the calculator
A leftover value from a previous problem stays in memory.
Fix: Clear the time value of money registers (2ND, CLR TVM on the BA II Plus) and set FV = 0 for full amortization.

Worked examples

Example 1

A fully amortizing loan-type bond has a principal of €100,000, an annual rate of 6% and four annual level payments. The payment is €28,859.15. What is the principal repaid in the second year (to the nearest euro)? Options: A) €6,000 B) €22,859 C) €24,231

Show the solution

Year 1 interest = 100,000 × 0.06 = €6,000.
Year 1 principal = 28,859.15 − 6,000 = €22,859.15.
Balance after year 1 = 100,000 − 22,859.15 = €77,140.85.
Year 2 interest = 77,140.85 × 0.06 = €4,628.45.
Year 2 principal = 28,859.15 − 4,628.45 = €24,230.70, about €24,231.
Eliminate A (that is interest in year 1) and B (that is year 1 principal; principal must rise).

Answer: C) €24,231

Example 2

A company issues a $50 million bond with a 5% annual coupon and a bullet structure maturing in 10 years. Another $50 million bond is partially amortizing with the same rate. Which statement is correct about the bullet bond? Options: A) Its annual coupon falls each year as principal is repaid B) It pays a $2.5 million coupon each year and repays $50 million at maturity C) It has a balloon payment smaller than its annual coupon

Show the solution

Bullet bond: principal is repaid only at maturity, so the balance stays $50 million.
Annual coupon = 50 million × 5% = $2.5 million, constant every year.
Option A describes an amortizing bond, so it is wrong.
Option C mixes up terms: a balloon payment belongs to a partially amortizing bond, not a bullet bond.
Option B matches the bullet structure.

Answer: B) It pays a $2.5 million coupon each year and repays $50 million at maturity

Exam tips

Questions often give a short description of cash flows and ask you to name the structure. Look at whether the balance falls and where it ends.
For amortization numbers, compute only what is asked. One or two periods is usually enough, so avoid building the whole schedule.
On sinking funds, expect conceptual items on who benefits and which risk rises: the lender gets lower credit risk, but faces reinvestment risk if bonds are retired early.
With three options and no penalty, always answer. Eliminate any option that has constant interest in an amortizing loan or zero principal before maturity in an amortizing one.
Check calculator settings before each time value problem: payments per year, and FV = 0 for full amortization.

Practice questions from Fixed-Income Instrument Features

Maturity, Principal Repayment and Amortization: frequently asked questions

What is the difference between a bullet bond and an amortizing bond?

A bullet bond repays all principal at maturity, so coupons stay constant. An amortizing bond repays part of the principal with each payment, so the balance and the interest portion fall over time.

What is a sinking fund provision in a bond?

It requires the issuer to retire a portion of the bond issue before maturity, either by setting aside money to buy back bonds or by calling a part of them. It lowers credit risk but adds reinvestment risk for investors.

What is the difference between fully and partially amortizing bonds?

A fully amortizing bond pays the balance down to zero by maturity. A partially amortizing bond leaves a remaining balance that is paid as a balloon payment at maturity.

Does the principal portion stay constant in a level-payment amortizing bond?

No. The total payment is constant, but interest is charged on a shrinking balance. So the interest part falls and the principal part rises each period.